Trolling Pandemic Era Recovery Lows

• Topline ISM Manufacturing Report index fell for a second consecutive month in July 2022, down slightly to 52.8
• Manufacturers’ prices fall dramatically, down 18.5 index points in July 2022 to 60.0 (from 78.5)
• New Orders fell further into contraction territory in July 2022, down to 48.0 from 49.2 in June
• Inventories for manufacturers and their customers are normalizing, both component indices up for July 2022

The ISM Manufacturing Report saw a slight decline in July 2022, down to 52.8 from 53.0 in June. This is the second consecutive monthly decline for this report and puts the topline index near the lows seen in the early stages of pandemic era recovery (52.4 in June 2020). The details of the ISM Manufacturing Report suggest that “Demand Destruction” is at hand. The Federal Reserve is doing its job in attempting to slow economic activity in its fight against inflation. One of their talking points is that tighter monetary policy can induce a slowdown in demand, which in turn will relieve some of the upward pressure on consumer price growth. Manufacturers reported that both their New Orders and Production activity eased in July from the month prior, demonstrating that economic activity is weakening and demand for manufacturers’ output carries little momentum into the second half of 2022.

Commodity Prices faced by manufacturers saw a sharp decline in July 2022 on the back of easing oil prices. This component index fell to 60.0 from 78.5 in June and is now down from 87.1 in March. Keeping the breakeven threshold of an index level of 50.0 in mind, Commodity Prices’ upward pressures are nearing stability. Prices paid by manufacturers inevitably add to consumer costs as they are passed on by both wholesalers, transportation intermediaries, and retailers. Before consumer price growth can hope to ease, producers’ own costs must settle. Prices will remain high in the near term on an absolute basis, but the threat of rampant price growth throughout the manufacturing supply chain seems to be receding.

The ISM Manufacturing Report’s Employment component index for July 2022 remained in the contractionary territory – up modestly for the month to 49.9 (47.3 in June). This result is the third consecutive month below the breakeven threshold of 50, highlighting weakening demand pressures. The Supplier Deliveries component index remained above 50 in July 2022 (55.2) and manufacturers’ inventories continued to build, with that index rising to 57.3 in July 2022 versus 56.0 in June – and up from 51.6 in April. Combined, these readings suggest that both labor and capital resources are working toward equilibrium for manufacturers, allowing prices to naturally react to a more balanced supply/demand environment throughout the rest of this year.

The Bureau of Economic Analysis’ GDP report, released last week, showed a second consecutive quarter of decline in 2022Q2. While this metric does not officially determine a recession, slowdowns in the details indicate that the U.S. economy is at the very least weakening. The ISM Manufacturing Report for July reinforces this notion and hints that Industrial Production – which is one of the indicators that official recession calls are based upon – may well follow up its June 2022 monthly decline with further weakness in the months to come.

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